20/12/2021

How can the actuarial profession leverage the growing regulatory interest in climate reporting?

Over the past couple of years, many authorities around the world have declared a climate emergency. It is now widely accepted that climate change presents a material systemic financial risk. As life actuaries, our work includes analysing long-term financial risks and opportunities, so this would include considering the issues and scenarios that may arise in the coming decades from climate change.

Given actuaries’ long-term view, deep understanding of the life insurance sector, and experience in regulated financial risk reporting, we have an opportunity to make material contributions to climate change preparedness and frameworks as life insurers integrate climate change considerations and perspectives into their business models.

What might this look like in practice? How can actuaries provide advice, influence decision-makers, and move towards defining best-practice on climate issues? One approach is to leverage the growing regulatory interest in climate reporting.

The most widely-adopted guidance on climate reporting worldwide, and the most relevant for UK life insurers, is produced by the FSB’s Taskforce on Climate-related Financial Disclosures (TCFD). Since the TCFD’s disclosure recommendations were released in 2017, they have gained significant traction with regulators globally.

The Climate Change Working Party’s Reporting sub-group has carried out initial high-level research to understand how life insurers are reporting their climate-related risks and opportunities. We have also considered the actions being taken by insurers to implement the TCFD’s recommendations.

In summary:

We see significant differences in approach to climate change reporting between countries and individual companies.
Pressure from governments and regulatory bodies is often the key factor in the TCFD adoption.

Considering first the variation by country:

The UK is one of the leading countries in this field, and the government has set out a roadmap towards mandatory compliance with the TCFD recommendations. Large asset managers and insurers will be expected to make disclosures in accordance with the TCFD framework for the year 2022, with smaller companies following in 2023. Refinements to align with best practices are then expected to occur during 2024 and 2025.
The European Union and Japan are examples of regions that have made significant developments. Both regions are bringing in enhanced climate-related disclosure requirements incorporating TCFD recommendations.
Canada and Australia have made some progress. The Canadian government is implementing voluntary disclosure standards, using a ‘comply or explain’ approach.
The Australian Prudential Regulation Authority is considering enhanced supervisory action in line with the TCFD framework.
Many other countries are lagging on the adoption of climate reporting requirements. In India, for example, companies in several sectors are disclosing beyond the local regulatory requirements but the life insurance sector has a lot of catching up to do on climate reporting.

To assess variation amongst companies operating within the same region and regulatory context, we focussed our research on 20 of the largest UK life insurance companies and reinsurers, using publicly available information. Of the 20 (re)insurers in our sample, 13 have formally signed up to the TCFD at the time of writing.

A brief outline of our findings is shown below, following the four pillars of climate reporting recommended by the TCFD framework.

Governance: Some but not all companies state that they have incorporated climate considerations into their governance structure. Committees are often given the responsibility for climate-related issues. Some companies reflect performance on climate-related issues in the executive remuneration and incentive plans.
Strategy: Some but not all companies have factored climate-related considerations into their overall strategy. Leading companies have produced dedicated climate reports, showing the resilience of their business strategy under different scenarios. Many companies view climate risk as part of the wider ESG or Sustainability commitments.
Risk management: Most companies have embedded climate risks into their existing risk management framework, with a few also mentioning that they have built climate risk into their ORSA. There were differences in the approach taken, with some insurers building climate-specific risk management practices, while others argue that their current approach will capture these risks without having to consider them explicitly.
Targets & Metrics: The key metrics disclosed by companies are the amount and intensity of greenhouse gas emissions, with targets often set to support the Paris Agreement (ie aligned to reach net-zero by 2050 or earlier). Most insurers can measure their direct emissions, but accurately measuring all indirect emissions is a challenge. This is especially the case for indirect emissions arising from life insurers’ large asset portfolios. Leading insurers have produced their own quantifiable measures of climate risks (e.g. Climate Value at Risk) and have made use of external experts (e.g. FinTechs, specialist consultancies, and academics).

In conclusion, there is a vast discrepancy in climate reporting across UK life insurers both in terms of content and presentation. Some companies have clearly invested a lot to improve their reporting processes, publishing ambitious and well-researched targets, alongside metrics to track against these ambitions. On the other hand, some companies disclose very little in relation to climate change, eg a small section within their annual report.

One promising sign is the pace of change. There have been significant improvements in the quality of climate reporting amongst UK life insurers over recent years. With the recent announcement of mandatory climate disclosures in the UK, we expect this trend to continue.

In 2022 we plan to conduct a survey amongst UK life insurers, to afford us a deeper understanding of the following areas:

insurers’ plans in the short, medium, and long term in developing a response to climate change
challenges facing insurers with new regulator-mandatory reporting requirements.

Over 2022 we will share further insights gained from our research, communicating observed best-practice to facilitate the progress of high-quality climate change reporting. There is a lot of work to do before the industry is consistently producing good quality climate reports. As actuaries, we have a role to play in encouraging meaningful change and analysis within our businesses, to best support our long-term view of life insurance stakeholders’ needs. Saving the world may even be a happy by-product.

Climate Change Working Party – Reporting Group

Craig Follows
Andrew Kitchen
Subhash Khanna
James Black

Task Force on Climate-Related Financial Disclosures | TCFD) (fsb-tcfd.org)